Ziff Davis Internet's online ad angle

Commentary: A bet that tech dollars will come back first

By

BambiFrancisco

SAN FRANCISCO (CBS.MW) -- At a time when advertising-dependent Internet companies are laying people off, slashing costs and not counting on advertisers to overspend the way they used to, at least one online player is banking on exactly the opposite kinds of conditions.

Ziff Davis Internet has gone on a hiring spree, spending millions in the hopes that it can amass enough technology advertising dollars to offset a cash-draining income statement.

Call it catch-up time for an online operation that's had three different owners in just over one year.

Appearances aside, it may be a reasonably good time to get going: Talented candidates are out of jobs while tech-driven advertising, the mainstay of online media, is a great market to target.

Some observers even believe that tech companies will be the first advertisers to start ramping up online media budgets again to lead Web-based advertising out of its dismal existence.

Yet here's why they may be wrong and why Ziff Davis may have to stretch out its budget as it attempts to finally cobble together a coherent offline and online advertising strategy.

Magazine publisher

Ziff Davis Internet is owned by privately-held Ziff Davis Media, the publisher of magazines like Interactive Week, PC Magazine and Computer Gaming World, running the online sites of those publications.

Next week, Ziff Davis Media is scheduled to take back ownership from CNet of the first of the URLs, or Web-domain addresses, of 11 Ziff Davis publications, like PC Magazine. By next March, it will again hold exclusive rights to the content and Web addresses of those sites.

Ziff Davis Media was established when venture firm Softbank sold Ziff Davis Publishing, which housed the techie magazines, to Willis Stein & Partners along with the current management of Ziff Davis Media for $780 million in April 2000.

Three months later, Softbank sold ZDNet, the online operations, to CNet
CNET, +0.66%
for $1.7 billion in stock. At the same time, CNet negotiated rights to the magazine content for five years. Well, so much for long-term contracts. That deal has since been restructured to send the online operations back into the hands of Ziff Davis Media.

Talk about a tech soap opera.

ZDI -- which has been coming together over the last six months -- was created and bankrolled with $160 million when Ziff Davis Media realized it would end up with exclusive rights to its publishing content much sooner than originally expected.

By year's end, ZDI expects to have 170 people on its payroll and it's already hired 120 so far this year. By year-end, it will have burned through $50 million.

At the helm is Wenda Harris Millard, one of the first five employees at advertising firm DoubleClick
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What does an advertising executive know about content? Well, she knows how to sell it. ExtremeTech, ZDI's site for hardcore enthusiasts, has already signed up Hewlett-Packard
HWP
and chip maker Crucial.com to buy ads.

Tech ads dry up

Good start. The challenge, of course, is plastering those Web pages with even more tech advertising, which isn't exactly falling out of trees. In May, ad pages in magazines were down 17 percent from a year ago, according to Lazard Freres & Co., which cited the Publisher's Information Bureau. Technology ads fared the worst, plunging 53 percent last month.

In the past few years, as hundreds of dot-coms went public, the Net sector was one of the biggest technology advertisers. But as the industry shakeout took hold, ad dollars dried up.

"Technology advertising spending won't rebound as fast as other areas because the dot-com bubble's burst is still rippling through the system," said Gordon Hodge, an analyst at Thomas Weisel Partners.

With the recent spate of tech giants like Nortel and Sun Micro Systems suffering slower business conditions, "It's hard to imagine tech advertising to come back any time soon," said Jim Nail, an advertising analyst at Forrester Research. "And targeting the technology decision buyers isn't imperative when they're not buying," he added. ZDI's tech sites attract advertisers that want to reach the technology decision-makers such as chief technology officers or chief information officers.

What's more, if tech advertising is a product-driven business, then it's shifting into low gear as new product development slows down, said Jordan Rohan, an analyst at Wit SoundView. Even consumer-oriented tech products like Palm Pilots are slow to get off the production line.

"Technology advertisers will be the bedrock of Internet advertising, but I wouldn't say that they're going to lead online advertising out of its slump," said Rudy Grahn, an analyst at Jupiter Media Metrix.

While tech advertising will be ubiquitous online, other industries may provide the growth spark. "Automotive and health care spending will represent about 15 percent of dollars spent online by 2005, vs. 7 percent now," Grahn said.

Reasons to be bullish

Still, there are reasons to be optimistic about tech advertising, especially if you're ZDI.

About 30 percent, or $2.2 billion, of the $7.5 billion in online advertising expected this year is estimated to be tech-related. The advertising budget allocated to go online is about 16 percent of total technology ad spending expected across all media this year, according to the Internet Advertising Bureau.

IBM
IBM, +0.53%
recently said it's increasing its online ad budgets by 15 percent, and Microsoft
MSFT, +0.90%
is setting aside megabucks for the fall launch of its Windows XP operating system and its Xbox video-game console. The two of them were the top spenders of online advertising among tech firms during the first three quarters of 2000, according to a survey by CMR.

"The Internet is a vehicle to inform clients about their product," said Andrew Swinand, general manager at StarcomIP, which placed $100 million of online advertising dollars last year. "And IT professionals can make better-informed purchase decisions from the Web, especially when advertising online becomes more interactive."

Indeed, tech advertising to specific buyers as opposed to brand building should help ZDI if the success of rival IDG is any guide.

"General run-of-site portal tech advertising is declining," said Kelly Conlin, CEO of IDG, publisher of 350 magazines and 300 Web sites. "Money is migrating to more specific sites in the technology category, and we're forecasting that tech online advertising will grow 66 percent in Europe this year, 45 percent in Asia and 12 percent in the U.S."

Jupiter's Grahn also pointed out that placing online advertisements targeting IT professionals can run between $50 and $100 per CPM, the industry rate based on cost per thousand page impressions. The published industry rate card is currently $29 per CPM and can run as low as $1 on a site like Yahoo
YHOO
he said.

So what does this mean for technology advertising and Ziff-Davis Internet?

Tech advertising is a solid market to tap in the long run, but watch for big traditional advertisers to make their way on the Web in a big way before tech advertising comes roaring back.

For ZDI, it means being conservative with its budget to ride out this year. But if the company finds itself in the hands of yet a fourth owner, then all bets are off.

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